IN THE SUPREME COURT OF THE STATE OF CALIFORNIA

Transcription

1 No. (Court of Appeal No. F068477) (Fresno County Super. Ct. No. 12CECG03718) IN THE SUPREME COURT OF THE STATE OF CALIFORNIA STEPHEN K. DAVIS, Plaintiff and Appellant, v. FRESNO UNIFIED SCHOOL DISTRICT, ET AL., Defendants and Respondents. After a Decision By the Court of Appeal, Fifth Appellate District PETITION FOR REVIEW ARNOLD & PORTER LLP SEAN M. SELEGUE (No ) sean.selegue@aporter.com RYAN M. KEATS (No ) ryan.keats@aporter.com Three Embarcadero Center, 10th Floor San Francisco, CA Telephone: Facsimile: Attorneys for Harris Construction Co., Inc.

2 TABLE OF CONTENTS Page ISSUES PRESENTED 1 REASONS WHY REVIEW SHOULD BE GRANTED 1 I. THE OPINION EXACERBATES A CONFLICT IN DECISIONS REGARD- ING WHETHER INDEPENDENT CONTRACTORS AND CONSULTANTS CAN BE DEEMED EMPLOYEES SUBJECT TO GOVERNMENT CODE SECTION II. THE OPINION S HOLDING THAT A SINGLE STATUTE MAY BE INTER- PRETED DIFFERENTLY IN CIVIL AND CRIMINAL CASES CONFLICTS WITH EXISTING LAW AND SHOULD BE REVIEWED. 5 CONCLUSION 7 - i -

3 TABLE OF AUTHORITIES Page(s) Cases California Hous. Fin. Agency v. Hanover/ California Mgmt. & Accounting Ctr., Inc., 148 Cal. App. 4th 682 (2007) 1, 2, 3, 4, 5 Clark v. Martinez, 543 U.S. 371 (2005) 5, 6 Harrott v. Cnty. of Kings, 25 Cal. 4th 1138 (2001) 5, 6 Hub City Solid Waste Servs., Inc. v. City of Compton, 186 Cal. App. 4th 1114 (2010) 1, 3, 4, 5 Metro. Water Dist. of S. California v. Superior Court, 32 Cal. 4th 491 (2004) 7 People v. Avery, 27 Cal. 4th 49 (2002) 6 People v. Christiansen, 216 Cal. App. 4th 1181 (2013) 1, 2, 3, 4, 6 United States v. Santos, 553 U.S. 507 (2008) 5 United States v. Thompson/Ctr. Arms Co., 504 U.S. 505 (1992) 6 Statutes GOV T CODE , 2, 3, 4, 5 Other Authorities 1 B.E. WITKIN, CALIFORNIA CRIMINAL LAW Introduction to Crimes 29 (4th ed. 2012) 5 3 B.E. Witkin, SUMMARY OF CALIFORNIA LAW Agency and Employment 21 (10th ed. 2005) 7 - ii -

4 ISSUES PRESENTED 1. Government Code Section 1090 provides that certain public officials and employees shall not be financially interested in any contract made by them in their official capacity, or by any body or board of which they are members. GOV T CODE Does the term employees in Government Code Section 1090 include independent contractors and consultants? 2. May a single statute, the violation of which has both criminal and civil consequences, be interpreted differently in criminal cases than in civil cases? 1 REASONS WHY REVIEW SHOULD BE GRANTED I. THE OPINION EXACERBATES A CONFLICT IN DECISIONS REGARDING WHETHER INDEPENDENT CONTRACTORS AND CONSULTANTS CAN BE DEEMED EMPLOYEES SUBJECT TO GOVERNMENT CODE SECTION The Opinion ( Op. ) concluded that the term employees in Government Code section 1090 encompasses consultants hired by the local government. Op. 40. In doing so, the Opinion relied upon two earlier decisions that held independent contractors could be considered employees for purposes of Section See Op (citing California Hous. Fin. Agency v. Hanover/California Mgmt. & Accounting Ctr., Inc., 148 Cal. App. 4th 682 (2007) and Hub City Solid Waste Servs., Inc. v. City of Compton, 186 Cal. App. 4th 1114 (2010)). However, the Opinion s analysis conflicts with another interpretation of Section 1090 in People v. Christiansen, To avoid repetition, Harris joins in the Fresno Unified School District s petition in its entirety, including the factual background sections

5 Cal. App. 4th 1181 (2013). That decision concluded that an independent contractor is not an employee within the meaning of the statute. Id. at The Opinion here did not attempt to rebut or even engage Christiansen s analysis but instead concluded that the Christiansen interpretation was applicable only to criminal prosecutions, not to civil actions such as this one. Op The Opinion s improbable conclusion that an independent contractor (here, a corporation) could be deemed an employee has its roots in two earlier decisions that untethered the definition of employee from its usual common law meaning. In California Housing, one of the defendants was an attorney who had been employed as general counsel for an agency and thereafter served as the agency s outside counsel. 148 Cal. App. 4th at 685. While serving as outside counsel, he influenced the agency to enter into a contract with a corporation in which he held an undisclosed ownership interest. Id. The court ruled that because the attorney exercised sufficient control over the agency i.e.,... in a position to contract in his or her official capacity then the attorney could be considered an employee for purposes of Section 1090, even though the attorney was an independent contractor, not an employee. Id. at 690; see also id. at 693 ( [A]n attorney whose official capacity carries the potential to exert considerable influence over the contracting decisions of a public agency is an employee under section 1090, regardless of whether he or she would be considered an independent contractor under common-law tort principles ). In support of this ruling, the court relied upon cases in which private attorneys acting as a government entity s counsel were considered 2 That rationale that the same statutory language can have different meanings in different proceedings itself conflicts with existing law and warrants review. See, infra, Part II

6 officers not employees under Section See id. at The issue was next addressed in Hub City. In that case, the City of Compton hired a company to manage the city s inhouse waste management operation. The company s sole shareholder served as a manager of the city s waste division. While serving in that capacity, he approached the Assistant City Manager and negotiated an agreement to take over the in-house waste disposal operation on a franchise basis. 186 Cal. App. 4th at The court held that the shareholder, through his company, performed public functions that brought his actions within section 1090 s prohibition on selfdealing. Id. at Based on that conclusion, the court held there was sufficient evidence for a jury to find that the shareholder was a public official or employee under section 1090 but did not specify whether the shareholder could be deemed an officer, an employee, or both. Id. at The court cited the same opinions as had California Housing about officers (not employees) subject to Section See id. People v. Christiansen, 216 Cal. App. 4th 1181 (2013), called foul. The court there disagreed with California Housing and Hub City s interpretation of Section 1090, concluding that the term employees in Section 1090 could not be expanded beyond that term s common law meaning. In Christiansen, the defendant had been employed as the Director of Planning and Facilities for the Beverly Hills Unified School District. Id. at She and the District entered into a new contract that terminated their employer- 3 The Opinion states that Hub City held the shareholder was an officer of the district (Op. 39), which is not clear from the Hub City decision. But assuming that to be so only undermines the Opinion s reliance on Hub City, because the Opinion concludes that Harris was an employee of the District, not an officer of it. Op

7 employee relationship and provided that she would continue to fulfill the same responsibilities as a consultant. Id. Subsequently, a company Christiansen owned, and to which she had assigned her consulting contract, entered into a new contract to perform program and management services relating to construction projects. Christiansen had advised the district to pursue a bond measure to fund those projects, and the new contract was conditioned on the bond measure s success. Id. at 1185, Christiansen was convicted of criminal violations of Section 1090 based on the new contract as well as several others, but the Court of Appeal reversed. Id. at Christiansen was not, as the jury had found, a district employee. Christiansen reasoned that, in the absence of a statutory definition of the term employees, the common law definition governed. Id. at In so holding, Christiansen noted that none of the cases cited in California Housing provides any support for the proposition that an independent contractor can be an employee within the meaning of section Id. at Although Christiansen s interpretation of Section 1190 contradicted that of the earlier two decisions, it sought to minimize the conflict by disclaiming any opinion on the soundness of those opinions in the civil context because the case at bench was criminal in nature. Id. at The Opinion here seized on that comment to brush aside Christiansen s interpretation of Section According to the Opinion, the stricter definition of the statutory terms Christiansen adopted is appropriate in the context of criminal prosecution, but is not appropriate in the context of civil actions seeking to invalidate a contract with a public entity. Op. 39. Consequently, the Opinion did not independently analyze which interpretation is correct, instead relying solely on the flawed California Housing and Hub City decisions. Op. 38 (stating that the decisions in Hub City and Hanover - 4 -

8 [California Housing] extended the conflict of interest prohibition to consultants without independently assessing that conclusion). The Opinion treated as an open issue only whether California Housing and Hub City could be extended to corporate consultants, skipping the more fundamental question of whether a statute governing employees could be extended to independent contractors in the first place. Op That basic issue incorrectly treated as a settled question by the Opinion should be reviewed by this Court to address the stark conflict concerning whether Section 1090 s regulation of government employees can properly be extended to the entirely distinct categories of outside contractors and consultants. II. THE OPINION S HOLDING THAT A SINGLE STATUTE MAY BE INTERPRETED DIFFERENTLY IN CIVIL AND CRIMINAL CASES CONFLICTS WITH EXISTING LAW AND SHOULD BE REVIEWED. The Opinion s conclusion that the same statutory provision may be construed differently in civil cases than in criminal matters conflicts with existing precedent. Prior to the Opinion, it was settled that the rules of statutory construction are generally the same for civil and criminal cases. 1 B.E. WITKIN, CALIFORNIA CRIMINAL LAW Introduction to Crimes 29 (4th ed. 2012). As this Court has previously explained, even where a statute that gives rise to both criminal and civil liability is ambiguous, the most limited application of the statue applies in both contexts. Harrott v. Cnty. of Kings, 25 Cal. 4th 1138, 1154 (2001). In other words, [t]he lowest common denominator, as it were, must govern. United States v. Santos, 553 U.S. 507, 523 (2008) (plurality opinion; emphasis in original); see also Clark v. Martinez, 543 U.S. 371, 380 (2005) ( we must interpret [a] statute consistently, - 5 -

9 whether we encounter its application in a criminal or noncriminal context ) (internal quotation marks omitted). The United States Supreme Court has aptly characterized as a dangerous principle the notion that judges can give the same statutory text different meanings in different cases. Clark, 543 U.S. at 386. To hold otherwise would render every statute a chameleon, its meaning subject to change depending on the presence or absence of constitutional concerns in each individual case. Id. at 382. That would be fundamentally unfair to persons subject to the statute and would perversely result in the courts rather than the legislature defining the scope of liability. See Harrott, 25 Cal. 4th at The position the Opinion has staked out is an extreme departure from precedent of this Court and of the United States Supreme Court. Indeed, when this issue whether the same statute could be interpreted differently in different proceedings was debated in United States v. Thompson/Ctr. Arms Co., 504 U.S. 505, (1992), only one Justice supported such differential treatment. Compare id. at (Stevens, J., dissenting), with id. at 518 n.10 (applying rule of lenity in a civil tax action because the statute in question has criminal applications ) (plurality opinion), and id. at 523 (opinion of Scalia, J.) (also applying rule of lenity to form a majority of the Court). 4 4 Nothing in Christiansen or the Opinion suggests that Christiansen applied (or should have applied) the rule of lenity, and for good reason: that rule is inapplicable unless two reasonable interpretations of the same provision stand in relative equipoise, i.e., that resolution of the statute s ambiguities in a convincing manner is impracticable. People v. Avery, 27 Cal. 4th 49, 58 (2002). Here, there is nothing ambiguous about Section 1090 s reference to employees. There is no credible argument that Harris, a corporation that contracted with the District, could be considered an employee under the usual legal rules applicable to (continued... ) - 6 -

10 The conflict in decisions the Opinion has created has farreaching applications in innumerable proceedings applying California statutory law. For that reason, the resolving the conflict in decisions is urgent and review should be granted. CONCLUSION For the foregoing reasons, review should be granted. DATED: July 13, Respectfully, ARNOLD & PORTER LLP SEAN M. SELEGUE RYAN M. KEATS By: /s/ Sean M. SELegue SEAN M. SELEGUE Attorneys for Harris Construction Co., Inc (... continued) employment relationships. See Metro. Water Dist. of S. California v. Superior Court, 32 Cal. 4th 491, (2004) (where term employee is undefined, legislature intended to adopt common law definition, which refers to traditional master-servant relationship and excludes independent contractors); 3 B.E. WITKIN, SUMMARY OF CALIFORNIA LAW Agency and Employment 21 (10th ed. 2005) (independent contractor is one who exercises independent employment or occupation and represents employer only as to results of work; chief consideration is that employer has no right to control mode of work). Davis did not argue to the contrary. See Appellant s Opening Brief at 42 (arguing that Section 1090 should be broadly interpreted to include contracted consultants and professionals such as Harris)

11 CERTIFICATE OF COMPLIANCE PURSUANT TO CAL. R. CT. 504(d)(1) Pursuant to California Rule of Court 8.504(d)(1), and in reliance upon the word count feature of the software used to prepare this document. I certify that the foregoing Petition for Review contains 1,914 words, exclusive of those materials not required to be counted under Rule 8.504(d)(3). DATED: July 13, /s/ Sean M. SELegue SEAN M. SELEGUE

12 EXHIBIT A

13 Filed 6/19/15 (unmodified opinion attached) CERTIFIED FOR PUBLICATION IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA FIFTH APPELLATE DISTRICT STEPHEN K. DAVIS, Plaintiff and Appellant, v. FRESNO UNIFIED SCHOOL DISTRICT et al., F (Super. Ct. No. 12CECG03718) ORDER MODIFYING OPINION [No Change in Judgment] Defendants and Respondents. THE COURT: It is ordered that the published opinion filed herein on June 1, 2015, be modified as follows: 1. On page 3, the second sentence of the first paragraph under the facts heading, change In September 2012 to On September 26, At the end of the last paragraph on page 4, the last two sentences beginning However, consistent and ending with in fact, terminated, are deleted and the following sentences are inserted in their place. However, consistent with Davis s allegations of fact, Fresno Unified s opening brief acknowledged the Facilities Lease was in effect only during the construction of the school facilities and its counsel confirmed during oral argument that a phased completion of the project was not used in this case. Thus, the brief and counsel s statement do not contradict the allegation that Fresno Unified did not occupy or use the newly constructed facilities during the term of the Facilities Lease. 3. On page 5, the first paragraph under the proceedings heading, In November 2012 is changed to On November 20, 2012.

14 4. On page 5, the first sentence of footnote 4 beginning with Defendants could have is deleted and the following sentence is inserted in its place. Defendants could have avoided the uncertainty and risk associated with completing the project while this taxpayer challenge was pending by bringing a validation action under Code of Civil Procedure section 860 prior to starting construction. 5. On page 5, footnote 4, the following paragraph is added to the end of footnote 4. Davis s taxpayer suit is a timely reverse validation action because it was filed within 60 days of the adoption of the resolutions authorizing the execution of the Lease-Leaseback Contracts. (See Code Civ. Proc., 860, 863.) Besides being a taxpayer, Davis is the president of Davis Moreno Construction, Inc., a general contractor that has handled construction projects for school districts. (See Department of Industrial Relations v. Davis Moreno Construction, Inc. (2011) 193 Cal.App.4th 560, 573; Davis Moreno Construction, Inc. v. Frontier Steel Bldgs. Corp. (E.D.Cal. Nov. 9, 2009, No. CV-F OWW) 2009 U.S.Dist. Lexis ) 6. On page 10, the second full paragraph, at the end of the second full sentence the word lease is changed to leaseback. So the end of the sentence now reads: namely, the term of the leaseback. 7. The last two sentences of the second paragraph on page 10 and continuing to page 11, beginning However, the parties to a and ending lease-leaseback arrangement are deleted and the following sentences and footnote are inserted in their place. This shall be footnote number 9, which will require renumbering of all subsequent footnotes. However, the parties to a lease-leaseback arrangement can achieve the same result without structuring the transaction as a leaseleaseback. For instance, the same extended stream of payments to the builder can be set forth in a payment schedule to a traditional construction agreement. Also, such an agreement can provide the school district with the same use and ownership of the new facilities that it received under a lease-leaseback arrangement. 9 9 Here, Davis alleged that the terms governing the construction and payments could have been set forth in a traditional purchase 2

15 type construction contract and, as a result, the formalities of a site lease and leaseback added nothing of substance to the transaction because they did not provide financing for the project. 8. On page 11, the first sentence of the first full paragraph, beginning Consequently, we is deleted and the following sentence is inserted in its place. The fact that the same results could have been achieved under an alternate, simpler contractual arrangement leads us to consider why the Legislature chose a complicated lease-leaseback structure for builder-financed construction. 9. At the end of the third paragraph on page 17, after the sentence ending or any other published decision, add as footnote 11 the following footnote, which will require renumbering of all subsequent footnotes. 11 The current use of section as a lease-leaseback delivery method has not been without controversy, which may explain why the Construction Provisions contain an indemnity provision whereby Fresno Unified agreed to indemnify, hold harmless and defend Contractor from any action to challenge the propriety or legal authority of [Fresno Unified under section 17406] to enter into the Construction Provisions, the Site Lease or the Facilities Lease. Fresno Unified also agreed to pay all Contractor s costs in defending any such action, including any legal fees and judgments. 10. On page 23, the following sentence is added to the end of the second full paragraph. They also support Davis s allegations that the true nature of the Lease- Leaseback Contracts was that of a traditional purchase type construction contract and the purpose for using the lease-leaseback arrangement was to avoid the competitive bidding process by subterfuge or sham. 11. At the end of the second full paragraph on page 33, after the sentence ending in project is being constructed, add as footnote 18 the following footnote, which will require renumbering of all subsequent footnotes. 18 For purposes of demurrer, we accept the allegations about the existence and contents of the prior contract as true, even though counsel for Fresno Unified stated during oral argument that there was no preconstruction contract. 3

16 12. On page 33, third full paragraph, in the first sentence the word referred is changed to refers and in the second sentence the word cited is changed to cites. 13. On page 41, first sentence of the second full paragraph, the word fact is changed to facts. There is no change in judgment. Franson, J. WE CONCUR: Levy, Acting P.J. Gomes, J. 4

17 Filed 6/1/15 (unmodified version) CERTIFIED FOR PUBLICATION IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA FIFTH APPELLATE DISTRICT STEPHEN K. DAVIS, Plaintiff and Appellant, v. F (Super. Ct. No. 12CECG03718) OPINION FRESNO UNIFIED SCHOOL DISTRICT et al., Defendants and Respondents. APPEAL from judgment of the Superior Court of Fresno County. Donald S. Black, Judge. Carlin Law Group and Kevin R. Carlin for Plaintiff and Appellant. Briggs Law Corporation, Cory J. Briggs, Mekaela M. Gladden and Anthony N. Kim for Kern County Taxpayers Association as Amicus Curiae on behalf of Plaintiff and Appellant. Atkinson, Andelson, Loya, Ruud & Romo, Martin A. Hom and Jennifer D. Cantrell for Defendant and Respondent Fresno Unified School District. Fagen Friedman & Fulfrost, Kathy McKee, Paul G. Thompson, James Traber and Luke Boughen for California s Coalition for Adequate School Housing as Amicus Curiae on behalf of Defendant and Respondent Fresno Unified School District.

18 Lozoya & Lozoya and Frank J. Lozoya for Defendant and Respondent Harris Construction Company, Inc. -ooooo- Plaintiff Stephen Davis is a taxpayer challenging a noncompetitive bid contract between the Fresno Unified School District (Fresno Unified) and Harris Construction Co., Inc. (Contractor) for the construction of a middle school for $36.7 million. The construction was completed in 2014 pursuant to a lease-leaseback arrangement that Fresno Unified and Contractor contend is exempt from competitive bidding under Education Code section Davis alleged the school construction project should have been competitively bid because the lease-leaseback arrangement did not create a true leaseback or satisfy the criteria for the exception in section Davis also alleged Fresno Unified s board breached its fiduciary duties by approving the costly arrangement and Contractor had an impermissible conflict of interest that rendered the lease-leaseback agreement void. The trial court sustained demurrers filed by Fresno Unified and Contractor. Davis appealed. As to the causes of action based on the Education Code, we conclude (1) the competitive bidding process required by section is subject to the exception contained in section and (2) Davis adequately alleged three grounds for why section s exception did not apply to the lease-leaseback arrangement. First, Davis alleged the exception is available only for genuine leases and the subject leaseback agreement was simply a traditional construction agreement and not a genuine lease. Second, Davis alleged the agreement did not include a financing component for the construction of the project. Third, Davis alleged the lease-leaseback arrangement did not 1 All further statutory references are to the Education Code unless otherwise stated. 2

19 provide for Fresno Unified s use of the newly built facilities during the term of the lease, as required by section As to the conflict of interest cause of action, we conclude Government Code section 1090 s prohibition of such conflicts extends to corporate consultants. Davis has stated a violation of Government Code section 1090 by alleging facts showing Contractor, as a consultant to Fresno Unified, participated in the making of a contract in which Contractor subsequently became financially interested. We therefore reverse the judgment. FACTS This case involves a project for the construction of buildings and facilities at the Rutherford B. Gaston Sr. Middle School, located in southwest Fresno. In September 2012, Fresno Unified s governing board adopted a resolution authorizing the execution of contracts pursuant to which Fresno Unified would lease the project site to the Contractor, which would build the project on the site, and lease the improvements and site back to Fresno Unified. The contracts were a Site Lease and a Facilities Lease (collectively, the Lease-Leaseback Contracts). Under the Site Lease, Fresno Unified leased the project site to Contractor for $1 in rent. The Site Lease began on September 27, 2012, and terminated the same day as the Facilities Lease. The Site Lease is the lease in the lease-leaseback arrangement. The Facilities Lease was structured so that Contractor would (1) build the project on the site pursuant to the Construction Provisions attached as an exhibit to the Facilities Lease and (2) sublease the site and project to Fresno Unified 2 in exchange for payments under a Schedule of Lease Payments. The Construction Provisions were a detailed construction agreement (55 pages long) whereby Contractor agreed to build the 2 This sublease by Contractor of the site and facilities to Fresno Unified constitutes the leaseback part of the lease-leaseback arrangement. 3

20 project in accordance with the plans and specifications approved by Fresno Unified for a guaranteed maximum price of $36,702,876. Completion was to be 595 days from the notice to proceed. The Schedule of Lease Payments attached to the Facilities Lease simply referred to the payments for the Project as set forth in the Construction Provisions. The Construction Provisions outlined monthly progress payments for construction services rendered each month, up to 95 percent of the total value for the work performed, with a 5 percent retention pending acceptance of the project and recordation of a notice of completion. Final payment for all of the work was to be made within 35 days after recordation by Fresno Unified of the notice of completion. Simply put, the funds paid by Fresno Unified under the Facilities Lease were based solely on the construction services performed by Contractor. 3 Once the project was completed and the final lease payment made, the Facilities Lease terminated. Counsel for Fresno Unified confirmed at oral argument that the term of the lease was from the date of signing to the date of completion. As to possession of the project, the Facilities Lease stated that Fresno Unified was allowed to take possession of the project as it is completed. However, consistent with Davis s allegations of fact, Fresno Unified s opening brief acknowledged the Facilities Lease was in effect only during the construction of the school facilities. This fact was confirmed during oral argument when counsel for Fresno Unified stated that Fresno Unified did not occupy the school facility until the lease was, in fact, terminated. 3 Thus, the progress payments made by Fresno Unified under the Facilities Lease were not rent in the usual sense of the word that is, consideration paid periodically in exchange for the use or occupancy of real property. (Black s Law Dictionary (9th ed. 2009) p [definition of rent].) 4

21 As to ownership of the newly constructed improvements, the Facilities Lease provided that Fresno Unified would obtain title from Contractor as construction progresses and corresponding Lease Payments are made to [Contractor]. In addition, the Facilities Lease provided that once Fresno Unified paid all of the lease payments, all rights, title and interest of Contractor in the project and the site would vest in Fresno Unified. PROCEEDINGS In November 2012, Davis filed his original complaint. 4 The operative pleading is the first amended complaint (FAC) he filed in March The causes of action in the FAC are (1) violation of the competitive bidding requirements of the Public Contract Code by entering into an improper lease-leaseback arrangement that did not satisfy the criteria for the statutory exception outlined in subdivision (a)(1) of section (section 17406(a)(1)); (2) breach of fiduciary duty by the Board of Fresno Unified; (3) failure to comply with the competitive bidding requirements of section 17417; (4) conflict of interest by Contractor based on its participation in the planning and design of the project as a consultant to Fresno Unified before the contracts for the project s construction were awarded; (5) improper use of section et seq., based on the legal theory that leaseleaseback arrangements are allowed only when used for financing school construction; (6) improper delegation of discretion; and (7) declaratory relief. 4 Defendants could have avoided this post-completion taxpayer challenge by bringing a validation action under Code of Civil Procedure section 860 prior to construction of the project. A validation action allows a public agency to obtain a judgment that its financing commitments are valid, legal, and binding. If the public agency has complied with statutory requirements, the judgment in the validation action binds the agency and all other persons. (Friedland v. City of Long Beach (1998) 62 Cal. App.4th 835, 838.) The record in this case shows that the use of validation actions is a common practice for school construction projects structured as a lease-leaseback arrangement. (See fn. 5, post.) 5

22 Davis alleged that, although the site was leased by Fresno Unified to Contractor while Contractor performed the construction, there was no genuine leaseback to Fresno Unified because Fresno Unified did not regain the right to use and occupy the property during the leaseback period. Davis also alleged that Fresno Unified made payments that lasted only as long as the duration of construction, varied based upon the value of the work performed, and ended with the completion of the construction. In addition, Davis alleged that Fresno Unified did not have the right or practical ability to have beneficial occupancy of the demised premises during the term of the Facilities Lease to use them for their intended purposes. In April 2013, Fresno Unified filed a demurrer to the FAC, which was supported by a request for judicial notice. 5 In May 2013, Contractor filed a separate demurrer that was similar to Fresno Unified s. Davis opposed the demurrers and objected to the request for judicial notice. Davis also lodged 11 exhibits with the trial court to support his opposition to the demurrers. In August 2013, the trial court sustained both demurrers to each of the seven causes of action in the FAC. The court granted Davis 30 days leave to amend. Counsel for Davis informed counsel for Fresno Unified that Davis did not intend to file a second amended complaint. After the 30-day period expired, defendants filed applications for dismissal of the action and entry of judgment. In September 2013, judgment was entered in favor of Fresno Unified and Contractor. Davis appealed. 5 Fresno Unified s request for judicial notice included copies of 22 default judgments entered from December 2010 to July 2012 in validation actions brought by school districts in Los Angeles, Orange, Riverside, San Bernardino, Ventura and Kern Counties. The default judgments stated that site leases, subleases, and construction services agreements entered into by the school districts pursuant to section were not subject to the requirement in Public Contract Code section that construction contracts be awarded to the lowest responsible bidder. 6

23 DISCUSSION I. STANDARD OF REVIEW A. Demurrers Appellate courts independently review the ruling on a general demurrer and make a de novo determination of whether the pleading alleges facts sufficient to state a cause of action. (McCall v. PacifiCare of Cal., Inc. (2001) 25 Cal.4th 412, 415.) Generally, appellate courts give the complaint a reasonable interpretation, reading it as a whole and its parts in their context. [Citation.] (City of Dinuba v. County of Tulare (2007) 41 Cal.4th 859, 865 (Dinuba).) Also, the demurrer is treated as admitting all material facts properly pleaded, but does not admit the truth of contentions, deductions or conclusions of law. (Ibid.) Ordinarily, the allegations in a pleading must be liberally construed, with a view to substantial justice between the parties. (Code Civ. Proc., 452.) However, this principle of liberal construction does not apply when, as in this case, a plaintiff has been granted leave to amend and elects not to do so. (Reynolds v. Bement (2005) 36 Cal.4th 1075, 1091, abrogated on another ground in Martinez v. Combs (2010) 49 Cal.4th 35, ) In such cases, appellate courts will construe the pleading strictly, based on the rationale that the plaintiff s election indicates he or she believes the pleading has stated the strongest case possible. (Reynolds, supra, at p ) B. Statutory Construction This appeal presents a number of issues relating to the proper construction of the Education Code provisions addressing lease-leaseback arrangements and the Government Code provisions addressing conflicts of interest. Issues of statutory construction are questions of law subject to independent review by appellate courts. (Neilson v. City of California City (2007) 146 Cal.App.4th 633, 642.) 7

24 A reviewing court s fundamental task in construing a statute is to determine the intent of the lawmakers so as to effectuate the purpose of the statute. [Citations.] Courts start this task by scrutinizing the actual words of the statute, giving them their usual, ordinary meaning. [Citation.] When statutory language is clear and unambiguous (i.e., susceptible to only one reasonable construction), courts adopt the literal meaning of that language, unless that literal construction would frustrate the purpose of the statute or produce absurd consequences. [Citation.] Alternatively, when the statutory language is ambiguous, courts must select the construction that comports most closely with the apparent intent of the Legislature, with a view to promoting rather than defeating the general purpose of the statute. [Citation.] The interpretation of ambiguous wording is guided by the fundamental principle that courts construe those words in the context and with reference to the entire scheme of law of which they are a part. [Citations.] Courts resolving statutory ambiguity also may be aided by the ostensible objects to be achieved by the legislation, the evils to be remedied, the legislative history, and public policy. [Citation.] When a court interprets an ambiguous statute, it is not authorized to rewrite the statute. It must simply declare what is, in terms or in substance, contained in the statute. [Citation.] (POET, LLC v. State Air Resources Bd. (2013) 218 Cal.App.4th 681, 749.) The foregoing rules of statutory construction are subject to specific rules that apply to particular types of statutes. The specific rule relevant in this case provides that any statutory exception to competitive bidding requirements for government contracts are to be strictly construed. (Unite Here Local 30 v. Department of Parks & Recreation (2011) 194 Cal.App.4th 1200, 1209; see 45A Cal.Jur.3d (2008) Municipalities, 524, p. 301 [exception to competitive bidding should be strictly construed and restricted to circumstances that truly satisfy the statutory criteria].) II. EXCEPTION TO COMPETITIVE BIDDING FIRST CAUSE OF ACTION A. Background School districts can procure new facilities in various ways based on (1) different methods for financing the project and (2) different delivery methods for the construction. 8

25 1. Traditional Financing and Delivery The traditional method for financing new school facilities is for school districts to obtain voter approval for the issuance of general obligations bonds and then use the proceeds from the bonds to pay for the construction. (62 Ops.Cal.Atty.Gen. 209, 210 (1979).) The traditional delivery method for new school facilities is referred to as designbid-build, which involves three separate steps. (See 10 Miller & Starr, Cal. Real Estate (3d. ed. 2010) 27:27, p ) First, the school district hires an architect to design the project. Second, the district uses the design in its request for competitive bids from construction firms. Third, the winning bidder builds the project. School construction contracts are a type of public works contract subject to the competitive bidding process unless an exception applies. (See Pub. Contract Code, 20111, subd. (b).) Competitive bidding is favored by a strong public policy to eliminate favoritism, fraud and corruption; avoid misuse of public funds; and stimulate advantageous marketplace competition. [Citation.] (Marshall v. Pasadena Unified School Dist. (2004) 119 Cal.App.4th 1241, ) 2. Lease-Leaseback Delivery and Financing Method -- Section In 1957, the Legislature authorized another method for financing and delivery of new school facilities and made it exempt from the competitive bidding process. (Stats. 1957, ch. 2071, 1, pp ) This method, the crux of this appeal, has been referred to as a lease-purchase, but is now referred to as a lease-leaseback arrangement. 6 (See 56 Ops.Cal.Atty.Gen. 571, 572 (1973); Los Alamitos Unified School Dist. v. Howard Contracting, Inc. (2014) 229 Cal.App.4th 1222, 1224 (Los Alamitos).) 6 A good description of the use of a lease-leaseback arrangement for a public construction project is set forth in City of Desert Hot Springs v. County of Riverside (1979) 91 Cal.App.3d 441, ) There, the city leased land to a contractor for 50 years and the contractor subleased the completed city hall and public library back to the city for 15 years, with options for the city to purchase the buildings after five and 10 9

26 Under the lease-leaseback method, the school district leases land that it owns to a construction firm for a nominal amount ($1.00) and the construction firms agrees to build school facilities on that site. ( 17406(a)(1).) 7 The construction firm builds the facilities and leases them back to the school district for a specified time at a specified rental amount. Thus, the leaseback part of the arrangement involves the construction firm acting as landlord of the newly constructed facilities and the school district acting as the tenant. At the end of the lease, title to the new facilities must vest in the school district. ( 17406(a)(1).) 8 Under this financing method, the builder finances the project (probably with assistance from a third party lender) and is paid over the term of the lease, which can last 40 years. ( 17403; Stats. 1957, ch. 2071, p [former 18353].) The economic reality of the lease-leaseback arrangement is that the builder carries both the cost of construction and financing while the school district compensates the builder with a stream of payments spread over a specified period namely, the term of the lease. However, the parties to a lease-leaseback arrangement could achieve the same economic effect (i.e., stream of payments) and end result (i.e., the construction of facilities eventually owned by the district) without using a lease-leaseback arrangement. The same terms governing the construction and payment could be adopted in a traditional years. (Id. at pp ) The case also illustrates the contractor s use of the site lease and leaseback as security for a construction loan with a pay-off period equal to the term of the leaseback. (Id. at p. 445.) 7 Since its adoption in 1957, this section has been numbered ( ), ( ), ( ), and (1996 to present). (Stats. 1957, ch. 2071, 1, p. 3683; Stats. 1959, ch. 2, 1, pp ; Stats. 1976, ch. 1010, 2, p. 3167; Stats. 1996, ch. 277, 3 p ) 8 This type of lease-leaseback arrangement should not be confused with the type of arrangement authorized by the Leroy F. Greene State School Building Lease-Purchase Law of 1976, which involves state funding of construction. ( ) 10

27 construction contract, without a lease of the site and a leaseback of the facility, that included a long-term payment plan requiring the exact same payments as would have been contained in the lease-leaseback arrangement. Consequently, we consider why the Legislature chose a complicated leaseleaseback structure for builder-financed construction. The answer appears to be related to (1) a constitutional provision that prohibited counties, cities and school districts from incurring any indebtedness or liability exceeding the amount of one year s income without the assent of two-thirds of its voters and (2) the California Supreme Court s determination that leases do not create an indebtedness for the aggregate amount of all installments, but create a debt limited in amount to the installments due each year. (See City of Los Angeles v. Offner (1942) 19 Cal.2d 483 [applying former Cal. Const. art. XI, 18] (Offner).) Thus, the Legislature adopted the lease-leaseback structure to create a way for school districts to pay for construction over time and avoid the constitutional limitation on debt. (See former [amount of rental a district agrees to pay during any one year is an obligation of such district for such year only]; Stats. 1957, ch. 2071, 1, p ) Therefore, the formalities of the lease-leaseback arrangement were important to the Legislature in 1957 because of their effect on the project s financing. Specifically, the formalities spread the school district s liability for the construction and carrying costs over the term of the leaseback and limited the amount of debt attributed to the district for any one year. Next, we consider each component of a traditional lease-leaseback arrangement and the function of that component. The lease part of the lease-leaseback arrangement that is, the agreement pursuant to which the school district leases real estate it owns to a construction firm for $1.00 for the purpose of building new facilities on that real estate serves three functions. First, the site lease gives the contractor a possessory or leasehold interest in the real estate so that the contractor holds sufficient 11

28 property rights or interests to serve as the foundation for the leaseback. The fact the contractor holds these rights to the land lends weight and legitimacy to the leaseback and helps avoid the constitutional limitation on debt exceeding one year s income. (See Offner, supra, 19 Cal.2d at p. 486 [the aggregate amount of payments under a subterfuge lease are a present liability for purposes of the constitutional limitation on debt].) Second, the site lease solidifies the bundle of property and contractual rights (particularly the rental payments under the leaseback) that the construction firm can use as collateral to obtain third party financing. (See fn. 6, ante.) Third, the site lease formalizes the contractor s right to enter and occupy the location while building the new facilities. This last function is insignificant compared to the other two because California law implies into every construction contract a covenant that the owner will provide the contractor timely access to the project site. (Howard Contracting, Inc. v. G. A. MacDonald Construction Co. (1998) 71 Cal.App.4th 38, 50.) The leaseback part of a lease-leaseback arrangement is the mechanism by which (1) the contractor is compensated for its construction services and the cost of financing the project and (2) the school district s obligation to pay for the project is spread over a period of time. The leaseback, with its payment term of up to 40 years, allows a school to acquire facilities that it might not be able to pay for using other financing methods. As a result, the lease-leaseback method opened up a new source of financing for school construction namely, private sector funding through the contractor and a third party lending money to the contractor. Given the difficulties in obtaining adequate funding for the school construction needs of California in the post-war era, it appears that the primary purpose for the Legislature s adoption of section 17406(a)(1) s predecessor in 1957 was to provide a new source of financing for school construction. Use of the new source was encouraged by providing an exception to competitive bidding. The exception would have allowed school districts, contractors and lenders to enter into earnest negotiations of the construction and financing arrangements without the concern that the deal would be 12

29 subsequently derailed by the competitive bidding process. The exception also prevented school districts from being required to balance apples (construction terms) against oranges (financing terms) to determine which proposal was the lowest bid. Based on the statutory language and historical context, we conclude the primary purpose for the adoption of section 17406(a)(1) s predecessor was to provide a new source of financing for the construction of schools. We have not located, and the parties have not cited, any sources indicating the formalities inherent in traditional leaseleaseback arrangements had any importance to the design or construction aspects of the project. Thus, to the extent that defendants or an amicus curiae suggest the Legislature intended to create a broad or easily satisfied exception to the competitive bidding process because competitive bidding resulted in slower, more costly construction, 9 we regard this 9 These criticisms of competitive bidding are reflected in the findings made by the Legislature in connection with its adoption of the design-build delivery method of school construction. In 2001, the Legislature added a chapter to the Education Code authorizing the use of design-build contracts for school construction. (Stats. 2001, ch. 421, 1 (Assem. Bill No. 1402); ) Under the design-build delivery method, both the design and construction work is let to a single entity, which centralizes responsibility for both aspects of the project. ( , subd. (b) [definition of designbuild]; see 10 Miller & Starr, Cal. Real Estate, supra, 27:27, p ) Design-build contracts are not subject to the competitive bidding requirements in Public Contract Code section 20110, but the school district must (1) invite competitive sealed proposals, (2) award the contract to the responsible bidder whose proposal is determined to provide the best value to the school district, and (3) comply with the other requirements in section This selection method has been described as competitive selection. The Legislature found the benefits of the design-build delivery method include accelerated completion of the projects, cost containment, reduction of construction complexity, and reduced exposure to risk for the school district. ( , subd. (b).) Also, school districts may benefit by shifting the liability and risk for cost containment and project completion to the design-build entity. (Ibid.) The Legislature also declared its intent that design-build procurement does not replace or eliminate competitive bidding. ( , subd. (f).) The design-build delivery method was not utilized for the current project and, therefore, has no direct application to this case. 13

30 view of Legislative intent as unsupported by legislative history, historical context, or the concerns being addressed in In the future, a Legislature might balance the various costs and benefits associated with competitive bidding and with lease-leaseback arrangements and find there are efficiencies that justify excepting lease-leaseback arrangements from competitive bidding even when those arrangements do not provide financing for the construction. While the Legislature is free to make such a finding and amend the statute, we cannot treat recent criticism of competitive bidding as providing insight into the intent of the Legislature in Our view that obtaining a new source of school financing was the primary purpose of the lease-leaseback provisions in sections through is supported by Morgan Hill Unified School Dist. v. Amoroso (1988) 204 Cal.App.3d 1083, which described former sections through (the predecessors of ) as authorizing a method for financing school construction. (Morgan Hill, supra, at p ) Similarly, the Attorney General referred to former sections through as a construction funding method. (62 Ops.Cal.Atty.Gen., supra, at p. 210.) Although the lease-leaseback delivery method was authorized in 1957, an alternate form has been growing in use throughout California over the past 15 years. This variation of the lease-leaseback arrangement is the type used by Fresno Unified and Contractor in this case. Under this alternate approach, the school district pays for the construction (using local bond funds) as it progresses, with the final payment being made when construction is completed. As a result, the school district does not occupy and use the new facilities as a rent-paying tenant for a set length of time. Because the school district pays for the construction as it is completed, this alternate approach cannot be characterized as a method of financing the construction of new school facilities. 14

31 B. Text of Section Section gives school boards the authority to lease school property to another under an instrument providing for the construction of buildings on the property. Specifically, section provides: (a)(1) Notwithstanding Section 17417, the governing board of a school district, without advertising for bids, may let, for a minimum rental of one dollar ($1) a year, to any person, firm, or corporation any real property that belongs to the district if the instrument by which this property is let requires the lessee therein to construct on the demised premises, or provide for the construction thereon of, a building or buildings for the use of the school district during the term of the lease, and provides that title to that building shall vest in the school district at the expiration of that term. The instrument may provide for the means or methods by which that title shall vest in the school district prior to the expiration of that term, and shall contain other terms and conditions as the governing board may deem to be in the best interest of the school district. (Italics added.) C. The Exception Includes Facilities Leases An initial question of statutory construction raised by the parties is whether section creates an exception to competitive bidding for both the lease and the leaseback. Davis contends the exception applies only to the Site Lease and, therefore, the Facilities Lease (i.e., the leaseback) is subject to competitive bidding. This specific question of statutory construction was addressed by the court in Los Alamitos, supra, 229 Cal.App.4th The court interpreted section 17406(a)(1) s exception to competitive bidding as applying to the entire lease-leaseback arrangements, not just the site lease. (Los Alamitos, supra, at pp. 1224, 1229.) The text relied upon for this interpretation included the phrases without advertising for bids and [n]otwithstanding section (Id. at p ) The reference to section is significant because that section provides that leases entered into by school districts are subject to competitive bidding. The exception to competitive bidding was extended to facilities leases based on the language referring to an instrument that requires the contractor to construct on the demised premises a building or buildings for the use of 15